Indian government reshuffles budget plans due to Ukraine crisis: report

India is likely to rank among the emerging economies hardest hit by the Russia-Ukraine crisis as a surge in global commodity prices is expected to upend spending plans and derail its pandemic recovery, analysts say. If the conflict continues, India, which imports nearly 85% of its oil needs, risks seeing its budget, trade and accounting deficits swollen by a surge in crude oil prices to their highest level in more than a century. decade, which will also fuel inflation.

“Contagion from the current rise in geopolitical tensions is unlikely to remain limited to financial assets and warrant a change to our key FY23 macroeconomic forecast,” said Abheek Barua, chief economist at HDFC Bank.

The February budget was based on an average oil price of $75-80 a barrel for the fiscal year beginning April 1, but Brent briefly spiked Monday to nearly $140, its highest in more than a decade. .

A senior government official said if oil prices average $100 a barrel in the fiscal year ending March 2023, it could shave 90 basis points off growth, bringing it below 8%, against a forecast range of 8% to 8.5%.

In such a scenario, inflation would increase by 100 basis points and the current account deficit could widen by 120 basis points to reach 2.3% to 2.4% of GDP.

According to DBS Bank, every $10 a barrel increase in the price of oil raises India’s consumer price index-based inflation by 20 to 25 basis points, widens the current account gap by 0.3% of GDP and poses a 15 basis point downside risk to growth.

Soaring oil prices should also prompt the government to lower fuel taxes and reduce the burden on consumers. This in turn would reduce revenues, reducing the room for maneuver needed to stimulate growth.

Retail fuel prices could rise by 10% or more from this week as election results in key states roll in. To avoid backlash from voters at the polls, state-owned oil companies have not raised prices since November 4.

“Given the massive increase in supply, excise duty cuts could be undertaken, to ease pressure on purchasing power and incomes,” said Radhika Rao, an economist at DBS Bank.

But every rupee cut from fuel taxes reduces revenue from government coffers by 130 billion rupees ($1.7 billion) a year. Economists say India could lose up to 900 billion rupees trying to lower prices at the pump.

And a recent market rout, which forced a rethink of plans to rethink the $8 billion IPO of Life Insurance Corp, a state-owned company by the end of March, is likely to further hurt the financial situation. of the government.

RATING RISK

On the positive side, the government could make a profit by selling off some of its large grain stocks following a rise in world wheat prices which could boost India’s grain exports.

This could cover the expenses of its large annual grain purchases at prices above world levels in an effort to support farm incomes.

But India’s budget deficit had widened to a record 9.3% in the year to March 2021, thanks to efforts to cushion the blow of the coronavirus pandemic and revive the economy. growth.

That meant the debt-to-GDP ratio had climbed to over 90%, the worst among similarly rated emerging markets.

Although India’s ratings remained stable, agencies warned of long-term challenges and the need to reduce the debt-to-GDP ratio to more sustainable levels.

Government officials have said the budget deficit could decline 20-30 basis points from a target of 6.9% of GDP for the current fiscal year ending in March if LIC is not listed by the.

“Rating agencies weren’t very happy with the fiscal consolidation path we took in the budget. Further deterioration could worry them,” said a second government official, who also spoke as of anonymity.

The government is reworking some key budget figures and the outcome of next year’s spending plans could be very different from the budget presented last month, he added.

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